Is nonfood becoming a minor matter?
Rising inflation poses a serious threat to nonfood, says Prof. Dr. Carsten Kortum. liv.biz spoke with the head of the Business Administration and Trade program at the Baden-Württemberg Cooperative State University in Heilbronn about the Ukraine war, government measures and the impact on the nonfood industry.
What is inflation, what factors cause it and how can it be stopped?
Price changes in the retail sector are a normal part of everyday life. Fruit and vegetable prices, for example, change daily. All retailers with a high-low strategy work with temporary special offers. However, when prices for products and services rise across the board, this is referred to as inflation. The measurement includes all goods consumed by private households.
Inflation reduces the purchasing power of the currency. The ECB’s inflation target is 2 percent in the medium term, not 0 percent. A low level of currency devaluation is therefore targeted in order to avoid a deflationary spiral at all costs.
The ECB’s monetary policy has been extremely expansionary in recent years. The money supply and the central bank balance sheet have been massively expanded. This high money supply is now coming up against a reduced supply of goods. Compared to the central banks in the U.S. and the U.K., the ECB is not reacting and is turning a blind eye to developments. At the same time, these developments can be observed very well at Aldi and at the gas station for everyone to see. We are in danger of falling into a wage-price spiral that will be very difficult to stop. In the past, full braking by central banks has led to recessions. Since the central banks have taken over government financing, additional fuel has been added to the fire here.
What is needed to mitigate inflation and other consequences of the Ukraine war?
The state has the usual instruments of a fiscal policy at its disposal. At the beginning of the Corona pandemic, for example, the value-added tax was reduced for a limited period to stimulate consumption. These measures would be possible in the short term. Also, additional social spending is already being paid, such as heating cost subsidies.
The price increases for energy and food are hitting low-income households particularly hard. Social compensation must and will be created here. Overall, however, the government deficit will continue to rise and the higher debt will continue to burden taxpayers in the future. Especially with rising interest rates, the leeway of the public sector will be very much restricted in the future.
In the medium term, the state’s energy policy will be called upon to ensure stable prices and security of supply. Low energy prices due to subsidized nuclear energy and fossil fuels, to which external costs were never properly attributed, are a thing of the past. Climate protection and security of supply do not come for free. As a result, product prices will permanently move upward.
Besides inflation, what impact will the Ukraine crisis have on the nonfood sector?
Even before the Ukraine crisis, there was an inflationary effect on nonfood, which is now being exacerbated by rising energy prices. Ukraine is only a peripheral supplier of nonfood items. Wood products are particularly affected in the case of furniture retailers. In view of the already long delivery times, customers have to wait even longer for goods that have already been paid for. In the food sector, on the other hand, Ukraine is a major supplier of staple foods. It will hardly be possible to compensate for the shortfall and this will lead to lasting distortions in the market.
How does inflation affect purchasing behavior?
Consumers will reduce, postpone or even cancel their purchases due to tighter budgets. Low-priced private labels with the same quality as branded articles will win. Some retailers are well positioned here, having secured a good level of quality in all product groups through their own sourcing in Asia and cooperation with high-performance importers. However, there are also large retail chains that strategically use their own brands only as a supplement to offer a lower-priced alternative. Initiating a necessary turnaround here requires time and resources. Sustainable products will also be among the losers. Hybrid buyers will have to opt more often for conventional products again for budget reasons.
What impact does rising inflation have on the nonfood sector?
In the case of nonfood products, three influencing factors come together: rising producer prices in China, continued very high container freight rates and a weak euro against the USD. Depending on the freight intensity, purchase prices will rise by between 10 and 50 percent. Due to the time gap between the time of purchase and the time of sale, the price increases will only gradually reach the POS. Large-volume items such as camping furniture or barbecues will have to be offered at significantly higher selling prices.
Consumer reaction to this has yet to be seen. These items will be offered to a lesser extent in the promotional business, and sales will decline.
For nonfood in food retailing, there is a risk that the product groups will be seen even more as supplementary ranges. Nonfood is now only a profiling instrument for a few retailers. Space and advertising costs will be reduced.
How long will it be after the war ends before normality returns to trade?
I do not expect the conflict to be resolved quickly. International cooperation will continue to be affected. The new normal will look different from 2019. We had 10 good years in trade after the financial crisis. Now trade has also arrived in the VUCA world. For decision-makers, it’s a matter of managing the new normal.
Consumers will have to do without the jeans for 4.99 euros or the toaster for 9.99 euros, items with very little added value and quality. Retailers will not achieve the sales of the past at the increased prices. Less will be consumed and many items will become less important in the consumer’s consumption system.
If the ECB deviates from its previous monetary policy, we may see a recession. We will then have high inflation rates with zero growth: stagflation. A term that the younger generation has yet to learn.